How is gross profit calculated?

The calculation of gross profit is essential for understanding a company's profitability on its core business activities. Gross profit measures the difference between the sales revenue generated from selling products and the cost associated with producing those products, which is known as the cost of goods sold (COGS).

When you calculate gross profit using the formula "Sales Revenue - Cost of Goods Sold," you essentially assess how much money remains after covering the direct costs involved in producing those goods. This metric is significant as it provides insight into how effectively a company is managing its production costs relative to its sales. A higher gross profit indicates that the company retains a larger portion of sales revenue to cover operating expenses and generate net income.

The other options do not accurately reflect the definition of gross profit. The total revenue minus total expenses reflects net income, not gross profit, while net income plus operating expenses does not align with gross profit's calculations. Finally, gross profit cannot be calculated as sales revenue plus cost of goods sold, as this mix of figures does not represent a profit calculation but rather a summation of figures that does not apply in this context.